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5 Top Dividend Stocks in Metals and Mining

From copper and gold to steel and silver, here are the top stocks to earn dividend income from in the metals and mining sector.

The metals and mining sector is often a tough one for income seekers. That's because miners need to spend lots of money on the development of new mines to grow production and cash flow. These high capital costs leave them with precious little left over for dividend payments, especially when metal prices are down. That's why the dividend is often the first cut these companies make when facing a cash crunch.

That said, there are a few diamonds in the rough where income investors can collect a decent dividend yield from a metals company. Here are five top names worth digging into:

An aluminum leader and so much more

Rio Tinto is a global leader in aluminum, which is one of the most widely used metals in the world. In addition, the company also operates one of the world's largest integrated iron ore operations, with industry-leading margins. Furthermore, it's a large producer of copper and several other commodities, including one of the largest diamond producers in the globe. This diversification is a fundamental reason why Rio Tinto generates more than enough cash flow to support both its growth initiatives and a compelling dividend.

Rio Tinto's policy is to return 40% to 60% of its underlying earnings to investors over the long term. Because of that, its dividend does tend to fluctuate quite a bit each quarter. However, it has an excellent history of paying dividends, which will likely continue thanks to its strong balance sheet and diversified portfolio.

A global resources giant

BHP Billiton takes diversification to a whole other level. Not only is it one of the global leaders in copper production, but it's a major producer of iron ore, nickel, and zinc. However, in addition to those metals, the company also produces energy commodities such as coal, oil, and gas. Furthermore, it's in the process of building one of the largest potash mines in the world. That diversity of resources enables the company to generate gobs of cash flow to finance both cap ex and shareholder returns. That said, due to the volatility of commodity prices, BHP Billiton's dividend has moved around quite a bit over the past few years. However, for investors looking for a core holding to generate resource-linked dividend income, BHP Billiton is the top choice.

A heavy metal payout

Nucor is the largest steel producer in the U.S. as well as North America's largest recycler. That said, the company got so big by focusing on operating smaller mills that are more profitable. Because of that focus on profitability, the company has consistently generated positive cash flow, which gives it the money to pay a pretty generous dividend compared to its steel-making rivals. Furthermore, Nucor has steadily increased its payout each year, which enables investors to bank on a rather stable paycheck. Because of that, Nucor is the solid choice for investors that want a durable income stream.

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Panning for dividends in the precious metal space

The precious metal industry isn't known to be a bright spot for income investors because most miners plow all their cash flow back into building new mines. In fact, more often than not, they need to seek additional capital from outside sources, such as by signing royalty and streaming agreements with the likes of Franco-Nevada and Wheaton Precious Metals (formerly Silver Wheaton). Those agreements, however, provide both companies with mounds of free cash flow that they reinvest in acquiring additional assets as well as paying dividends.

In Franco-Nevada's case, it's the largest gold royalty company in the world. Because of that, the company collects a small percentage of the revenue generated from more than 40 mines around the globe. Those royalties add up, enabling Franco-Nevada to generate robust free cash flow each year. It sends a good chunk of that money to investors each year, and in 2016 it was the gold industry's best dividend payer after returning $157 million in cash to investors. Another important factor about Franco-Nevada's dividend is that the company has consistently increased it over the past decade, making it a great stock for investors seeking stable income growth linked to precious metals.

Meanwhile, Wheaton Precious Metals is the world's largest silver and gold streaming company. Its business model is slightly different from Franco-Nevada's focus on royalties in that instead of collecting cash off the top, Wheaton's streaming agreements enable it to buy silver and gold for a low fixed price, allowing it to cash in on the difference between that cost and market prices. As a result, it also generates very high margins, enabling it to produce ample free cash flow for additional streaming acquisitions and paying a dividend. That said, the company's dividend policy is unique in that it sets the payout at 20% of the average of the previous four quarters' operating cash flow. Because of that, the dividend fluctuates with precious metal prices, though that does mean investors collect more income when prices rise.

Investor takeaway

While the metals and mining industry isn't always the best place for income investors, it does offer some good options for investors who know where to look. That said, even these options come with caveats because many pay variable dividends that fluctuate with commodity prices. Because of that, investors will want to carefully consider whether or not they can handle this volatility before adding a metal-infused dividend to their portfolio.

Author

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries: Follow @matthewdilallo